Centsible Thoughts

Supply is usually the harder of the two major microeconomic forces to understand for the simple fact that most people find it to envision themselves as suppliers. In Microeconomics, Supply is defined as the market’s willingness to supply goods and services at various prices.

Perhaps the best way to understand supply forces is graphically.

The supply curve generally slopes upward. As prices rise, the quantity of goods the market will supply also increases.

This is generally for two reasons:

1) As prices rise, it attracts firms/suppliers from other industries/locations to join the market.
2) Economics has an idea called the law of increasing marginal cost. This basically argues that for most goods, the cost of producing more goods also rises. So for it to be profitable for firms to produce those goods, the price must be higher.

As with demand, it is important to distinguish between supply and quantity supplied. Quantity supplied is the specific quantity of goods/services produced at a given price while Supply is representative of the entire production schedule.

So now that we have defined Supply more broadly, we can discuss some of the more specific factors that influence it. There can be two types of changes when it comes to Supply curves: shifts of the supply curve and changes in the elasticity of the demand curve.

Shifts of the Curve
Shifts of the curve change the entire production schedule (the various quantities produced).

1. Changes in input prices: If the prices of inputs (such as labor, raw materials, or technology) used in the production process increase or decrease, it directly affects the cost of production. Higher input prices reduce profitability, leading to a decrease in supply, shifting the curve to the left. Conversely, lower input prices increase profitability, resulting in an increase in supply, shifting the curve to the right.
2. Technological advancements: Improvements in technology can increase the efficiency of production, leading to lower costs and higher levels of output for producers. This increase in efficiency allows firms to supply more goods or services at every price level, shifting the supply curve to the right.
3. Changes in the number of suppliers: An increase in the number of firms operating in a market typically leads to an expansion of total industry output, shifting the supply curve to the right. A decrease in the number of suppliers reduces industry output and shifts the supply curve to the left.
4. Changes in expectations: If producers anticipate future changes in market conditions, such as expecting higher prices, they may reduce current supply to take advantage of expected future profits. This anticipation can cause a decrease in current supply, shifting the curve to the left. If producers expect lower prices in the future, they may increase current supply to avoid potential losses, shifting the curve to the right.
5. Government policies and regulations: Changes in government policies, such as taxes, subsidies, or regulations, can directly impact production costs and incentives for producers. For example, a subsidy to producers can lower production costs, increasing supply and shifting the curve to the right. Increased regulation might raise costs, leading to a decrease in supply and shifting the curve to the left.
6. Changes in natural conditions: Natural events such as weather phenomena, natural disasters, or climate change can affect the production of certain goods or services. For instance, adverse weather conditions might reduce agricultural output, shifting the supply curve for agricultural products to the left.

Changing the Elasticity of the Supply Curve
Some changes of the curve warp the entire production schedule (the various quantities produced at different prices).

1. Availability of Inputs: The ease with which producers can access inputs like labor, raw materials, and technology affects the elasticity of supply. If inputs are readily available or can be quickly adjusted in response to price changes, the supply becomes more elastic. Conversely, if inputs are scarce or difficult to adjust, the supply becomes less elastic.
2. Time Horizon: Elasticity of supply often varies with the time horizon considered. In the short run, firms might not be able to adjust production levels easily due to fixed factors like capital and technology, leading to less elastic supply. In the long run, firms can make adjustments such as expanding or contracting production facilities, leading to a more elastic supply.
3. Flexibility of Production Processes: The flexibility of production processes influences supply elasticity. Industries with highly flexible production processes can quickly adjust output levels in response to price changes, resulting in a more elastic supply. Conversely, industries with rigid or specialized production processes may have less flexibility, leading to a less elastic supply.
4. Storage Capacity: For goods that can be stored, the elasticity of supply may be affected by the availability and cost of storage facilities. If storage is readily available and inexpensive, producers can stockpile goods during periods of low prices and release them when prices rise, leading to a more elastic supply.
5. Government Regulations: Regulations can affect the elasticity of supply by imposing restrictions or requirements on production. For example, stringent environmental regulations or licensing requirements may limit the ability of firms to increase production in response to price changes, leading to a less elastic supply.
6. Nature of the Industry: The characteristics of the industry, such as its size, structure, and level of competition, can influence supply elasticity. Industries with many small firms may have a more elastic supply because individual firms can adjust production independently. In contrast, industries dominated by a few large firms may have a less elastic supply due to the oligopolistic nature of the market.